Estimating Complementarity With Large Choice Sets: An Application to Mergers

53 Pages Posted: 11 Mar 2021

See all articles by Daniel Ershov

Daniel Ershov

Toulouse School of Economics

Jean-William Laliberté

University of Calgary - Department of Economics

Mathieu Marcoux

University of Montreal

Scott Orr

University of British Columbia (UBC) - Division of Strategy and Business Economics

Date Written: March 10, 2021

Abstract

Standard discrete choice demand models assume that products are substitutes. Merger analyses
based on these models may overstate consumer harm when producers of complementary products merge. Allowing for demand complementarity greatly complicates demand estimation, particularly when the number of choices is large. We introduce a straightforward Generalized Method of Moments estimator that identifies preferences allowing for (1) potential consumption complementarity, (2) price endogeneity and (3) large choice sets. Our estimator parsimoniously leverages information on consumer level bundle specific purchases and aggregate sales data. We apply this estimator to the chips and soda market and find a high degree of complementarity between these product groups. We show that a merger between PepsiCo/Frito-Lay and Dr. Pepper would increase soda prices by 30% less than suggested by a model that does not account for complementarity. Post-merger chip prices decrease. Overall, accounting for complementarity leads to positive welfare gains in some markets with large numbers of Frito-Lay varieties.

Keywords: Demand Complementarity, Demand Estimation, Discrete Choice Models, Mergers

JEL Classification: D22, D43, G34, L13, L40, L66

Suggested Citation

Ershov, Daniel and P. Laliberté, Jean-William and Marcoux, Mathieu and Orr, Scott, Estimating Complementarity With Large Choice Sets: An Application to Mergers (March 10, 2021). Available at SSRN: https://ssrn.com/abstract=3802097 or http://dx.doi.org/10.2139/ssrn.3802097

Daniel Ershov

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://danielershov.com

Jean-William P. Laliberté

University of Calgary - Department of Economics ( email )

2500 University Dr. N.W.
Calgary, Albetra T2N 1N4
Canada

Mathieu Marcoux

University of Montreal ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Scott Orr (Contact Author)

University of British Columbia (UBC) - Division of Strategy and Business Economics ( email )

2053 Main Mall
Vancouver, British Columbia
Canada

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